June 18 (Bloomberg) -- Phyllis Borzi spent decades helping
invent ways to protect people from unpleasant surprises in their
health and retirement plans. Never did she run into the kind of
resistance finance firms have mustered against her latest idea.

And rarely has the industry met a bureaucrat so difficult
to shut down.

Borzi, an assistant secretary at the U.S. Labor Department,
has spent four years battling the full force of the financial
lobby, interference from the White House and pressure from
lawmakers of both parties over rules for individual retirement
accounts and 401(k) plans.

She has long argued that people’s retirement savings can be
eroded by high fees or imprudent investments recommended by
advisers with hidden incentives. She is pushing for brokers to
be held to a legal standard that they must act in a client’s
best interest, an obligation known as a fiduciary duty.

Firms including Morgan Stanley and Fidelity Investments,
which say the change would hurt, not help, small investors,
appeared to have won the latest round last month. Yet neither
side shows signs of backing away. In speeches, Borzi invokes the
movie Groundhog Day, in which events are relived over and over.
Financial lobbyists see it as a game of Whac-A-Mole. No matter
how many times they pound her down, Borzi keeps popping up.

“She does not pander to the industry,” said Barbara
Roper, director of investor protection for the Consumer
Federation of America, which backs Borzi’s effort.

‘Iron Fist’

Consumer advocates compare Borzi to Gary Gensler, the ex-U.S regulator who clashed with Wall Street as he tried to make
private trading of derivatives more transparent. Roper said the
comparison is apt -- up to a point.

Industry groups say Borzi’s efforts are misplaced, because
if there are brokers who take advantage of clients, they’re a
tiny minority. The Securities and Exchange Commission, the
states and self-regulatory organizations already police the
industry for such conflicts, they add.

“There is no evidence of a crisis, no evidence of a
problem,” said Kenneth Bentsen, president of the Securities
Industry and Financial Markets Association, known as Sifma, Wall
Street’s largest lobbying group.

‘Happy Face’

The story of Borzi’s quest shows how one individual in the
government can drive a policy forward by dint of her own will
and conviction. Yet her failure thus far is a lesson in what
happens when that idea collides with longstanding business
practices that involve trillions of dollars.

Borzi’s most recent setback came late last month when the
Labor Department quietly issued a notice postponing her proposal
until January. It had been expected to be released in August.
The move left her small band of supporters outside government
wondering if their chances for success were waning.

“I don’t know how you put a happy face on it,” said Knut
Rostad, a compliance officer at an investment advisory firm and
founder of the Institute for the Fiduciary Standard. “If
someone was going to be sober about it, they’d say we are
running out of years.”

Borzi (pronounced BOR-zhee) has been unusually silent since
the delay, which comes after she was forced to withdraw her
original fiduciary regulation in 2011. Her spokesman Mike Trupo
didn’t respond to requests for an interview.

College Professor

A grey-haired lawyer recognizable by her large, round
glasses, Borzi, 67, seems an unlikely antagonist of big banks
and brokerages. She was a research professor at George
Washington University’s public health school before being named
in 2009 by President Barack Obama to the Labor post that
oversees private-sector benefit plans. She earned a master’s in
English from Syracuse University and her law degree from
Catholic University in Washington.

While little-known outside of her field, Borzi’s impact on
the U.S. health and retirement systems has been profound. Along
with her pension responsibilities at Labor she has been a point
person on implementing the Affordable Care Act, Obama’s health
care law.

Many of Borzi’s accomplishments came while she served for
16 years as pension and employee-benefits counsel for a U.S.
House subcommittee. She’s known as the “mother of COBRA” for
her work on that law, which allows workers who lose their jobs
to temporarily extend their health coverage. She also proudly
cites her authorship of a law giving women more rights to their
husbands’ pensions in the case of an early death or divorce.

Turning 65

How Americans save for their latter years has changed
vastly since Labor first set rules for retirement funds in the
1970s. Many workers had employer-controlled pensions and the
401(k) didn’t exist. Now, pensions are rare and tens of millions
of people rely on their 401(k) plans and IRAs, which together
hold almost $11 trillion.

Those resources are increasingly needed. Some 10,000 people
will turn 65 every day from now until Dec. 31, 2030, Borzi
pointed out in a March speech to the Financial Services
Roundtable, an industry trade association that opposes her plan.
She told the group the fiduciary standard is a “critically
important” consumer protection.

“People who hold themselves out as experts, who cultivate
a relationship of trust with clients, need to put their money
where their mouths are,” she said. “They need to actually put
the clients’ interest first.”

Chamber Lobbying

Borzi’s opponents are Wall Street banks with brokerages,
mutual fund companies that thrive on clients who roll their
401(k) plans into IRAs, insurers selling annuities, and
independent brokers and financial planners. Besides Fidelity and
Morgan Stanley, they include Bank of America Corp., UBS AG and
Ameriprise Financial Inc., along with finance trade groups, the
U.S. Chamber of Commerce and American Council of Life Insurers.

The industry contends Borzi’s change would throw the system
into chaos by making it too expensive for financial firms to
manage most retirement accounts.

Typically, customers can turn to one of two kinds of
investment professionals: brokers, who generally offer limited
advice and are paid a commission on each trade; and investment
advisers, who provide more personalized counsel and charge an
annual flat fee based on the size of a client’s portfolio. Both
are regulated by the SEC, though when dealing with retirement
accounts they fall under Labor’s purview.

‘Suitable’ Standard

Brokers are held to a “suitability” standard, meaning
they must reasonably believe their recommendation is right for a
client. Investment advisers operate under the fiduciary
standard, which imposes a much tougher overall responsibility
for the customer’s welfare.

One rationale for changing the rules is that it would be
easier for investors to expect the same treatment no matter who
they deal with. Brokers, though, say that if they became
fiduciaries it would create more paperwork and a higher risk of
lawsuits from displeased customers, raising costs so much they’d
be forced to switch clients into advisory accounts.

That model, the industry argues, isn’t economical with
smaller accounts -- those with balances under $50,000. Those
investors would likely be forced to handle savings on their own,
sorting through options online without professional help.

“We don’t want to price modest-income people out of the
market of getting advice,” said Tim Pawlenty, president of the
Roundtable.

Undercover Probe

A 2011 study by the SEC’s staff, mandated by the Dodd-Frank
law, noted “robust recent evidence that many retail investors
do not understand or are confused by the different standards of
care applicable to investment advisers and broker-dealers.”
Outside of the Labor process, the SEC is also considering
whether to have a fiduciary standard for brokers.

The Government Accountability Office last year decided to
test how frequently salespeople for financial firms provide
misleading advice. It had an investigator pose as a customer
asking how to handle a 401(k) account after leaving his job.

After checking with 30 firms that administer the accounts,
the GAO determined that investors were often given incomplete or
incorrect guidance that steered them to convert their 401(k)
into an IRA run by the same company, a move that could lead to
higher fees and less protection. The report, released in April
2013, urged Labor to complete its fiduciary rule and require
that brokers and other salespeople disclose conflicts of
interest “in a clear, consistent and prominent manner.”

Lawmaker Letters

Borzi first published her plan in late 2010, about a year
after she became Labor’s assistant secretary for the Employee
Benefits Security Administration.

The backlash was swift. Wall Street’s biggest lobbying
groups, including the Roundtable and Sifma, fanned out on
Capitol Hill, asking Democrats and Republicans to send letters
to Labor and the White House. They complained to lawmakers that
Borzi had leapt into the fray without properly consulting with
other regulators or the industry.

Borzi was summoned to a hearing before a House Education
and the Workforce subcommittee, where lawmakers from both
parties echoed industry concerns. They complained about her lack
of coordination with the SEC. Representative Joe Heck, a Nevada
Republican, told Borzi he was hearing from many brokers in his
district who said they’d be unable to charge commissions.

Frank Note

Ultimately, more than 200 lawmakers weighed in with letters
to Labor -- including one of the authors of Dodd-Frank, then
Democratic Representative Barney Frank of Massachusetts, who
wrote to “strongly urge” the department to withdraw and revise
its rule.

The Financial Services Institute, a trade group that
represents independent broker-dealers and financial advisers
around the country, got 7,000 members to fax personal letters to
the White House opposing the rule.

According to two people who worked on the issue and spoke
on condition of anonymity, the Roundtable contacted Wall Street
Journal editorial writers. The newspaper published a piece in
August 2011 citing industry-funded research that found the
fiduciary rule could cut off 7 million IRAs from meaningful
investment services.

“Someone from the White House needs to step in here before
Ms. Borzi’s savings bomb falls on the heads of American
investors,” the editorial concluded.

Economic Council

The White House did step in, according to people who
lobbied on both sides of the issue. The industry had worked
through Obama’s National Economic Council, arguing to its
director, Gene Sperling, that the Labor Department was creating
a regulatory morass, said three people who attended meetings
with the council.

Sperling, who left the post in March, said in an interview
that while the economic team “has always taken a clear position
that there are some real conflict-of-interest problems” in the
broker-client relationship, “we felt it was important to make
sure any steps were balanced, well-targeted and reasonably
coordinated.”

The White House’s concerns were conveyed to the leadership
at the Labor Department, according to a person who worked on the
issue for the government.

That September, Labor issued a press release saying it was
withdrawing the regulation and would re-propose it in “early
2012.”

‘More Input’

The decision, according to the statement, was “in part a
response to requests from the public, including members of
Congress, that the agency allow an opportunity for more input on
the rule.”

Since then, the Labor Department has kept pushing back the
date for the new version of the rule. In late 2013, it put out a
schedule setting the release for August 2014. Early this year,
Borzi contacted outside supporters as she sought to build
momentum on Capitol Hill, according to two people who
participated in a conference call with her. Among groups active
on the issue were AARP, the AFL-CIO and the consumer federation.

Again, the industry counter-attacked. Lobbyists raised the
specter of the upcoming mid-term elections to force another
delay, people familiar with the matter said.

Sifma and other trade groups recently contacted about 40
members of the House and Senate, many in tight races, and
suggested they ask the Obama administration to postpone the rule
until after the November elections, according to one person
familiar with the strategy. The message, the person said, was
that it was a bad time to hurt mom-and-pop investors still
struggling in the wake of the financial crisis.

Shifting Donations

Brian Graff, head of the National Association of Plan
Advisors, whose members serve employer-sponsored retirement
plans, said that prime targets included Senators Kay Hagan of
North Carolina and Mark Pryor of Arkansas, two Democrats “who
don’t want another issue that could be used by their
opponents.”

Political donations were a part of the effort. The
Financial Services Institute rebalanced its giving toward
Democrats, reversing its usual Republican tilt. The group also
focused on the Congressional Black Caucus, making a contribution
to Maxine Waters, the ranking Democrat on the Financial Services
Committee, and seven other members of the group. All had signed
letters to Labor opposing the rule.

Soothing Tweaks

The industry also took its arguments to Labor Secretary
Thomas E. Perez, who in public comments had been supportive of
Borzi’s effort. Sifma and other groups circulated a study from
the U.S. Hispanic Chamber of Commerce in May that said almost
half of the small business owners it polled would cut back
employee matches or raise fees for their retirement programs if
the definition of fiduciary duty were expanded.

The survey was co-sponsored by law firm Davis & Harman LLP,
which said it was commissioned “on behalf of a coalition of
financial services organizations that provide retirement
services to millions of Americans.”

Xochitl Hinojosa, a spokeswoman for Perez, didn’t respond
to requests for comment.

When the Labor rule is finally proposed, the new version
will have tweaks designed to soothe some industry concerns,
Borzi has said.

Few expect the changes to end the long dispute.

“There is a high level of expectation that come next year,
this will be a battle,” Graff said.